What Are Typical ROI Ranges for Cost Segregation Studies?

Most property owners leave money on the table every tax season.

If you are a real estate investor or property owner looking for proven ways to maximize your tax savings, you need to understand what are typical ROI ranges for cost segregation studies.

The returns can change how you think about property investments and cash flow management.

What is Cost Segregation and How It Creates Value

Cost segregation is a tax strategy that breaks down your property into different parts for depreciation purposes.

Instead of depreciating your entire building over 27.5 years (residential) or 39 years (commercial), this approach identifies components that qualify for much shorter depreciation schedules.

Think of it like this: when you buy a commercial building for $1 million, the IRS normally makes you spread that depreciation over 39 years. That’s only about $25,641 per year in tax deductions.

But with cost segregation, an engineer can identify things like carpeting, lighting fixtures, parking lots, and specialized equipment that can be depreciated over just 5, 7, or 15 years instead.

Cost segregation creates value through three main ways:

• Immediate Cash Flow Improvement: You get bigger tax deductions now instead of waiting decades.
• Time Value of Money: A dollar saved today is worth more than a dollar saved in 10 years.
• Reinvestment Opportunities: The cash you save on taxes can be invested in more properties or improvements.

Typical ROI Ranges in Cost Segregation Studies

Cost segregation delivers some of the highest returns of any tax planning strategy available to property owners.

And real investors are seeing these results firsthand.

u/nawang013 shared their experience on Reddit:

• “Cost me around $5k for the study, but they reclassified appliances, flooring, even landscaping… Easily paid for itself.”

Another investor, u/Zasaky, reported even better results on a $425k property:

• “Study cost around $4k, but they broke everything down and front-loaded the depreciation. Ended up with close to $60k in bonus depreciation in year one, which more than paid for the study and wiped out a big chunk of my tax bill.”

In our experience, most studies deliver returns ranging from 4:1 to 65:1, depending on property characteristics and investor tax situations.

Here’s what this typically looks like across different property values:

• <$500,000 Property: Study cost ~$3,000-$7,000, typically generates $15,000-$35,000 in tax savings (approximately 4-10x return)
• $1 million Property: Study cost ~$7,000-$12,000, typically generates $50,000-$75,000 in tax savings (approximately 6-10x return)
• $5 million Property: Study cost ~$15,000-$25,000, typically generates $250,000-$375,000 in tax savings (approximately 15-25x return)
• $10 million+ Properties: Study cost can reach tens of thousands or more, but often achieves 20-65x returns with tax benefits potentially reaching several million dollars

Note: These numbers are approximate based on what we see in the industry and with our clients. Nothing is set in stone when it comes to study costs and potential tax savings. Actual savings depend on factors like property type, property value, construction methods, complexity, available documentation, and your specific tax bracket.

Now, if you want exact numbers for your specific property, you’ll need a professional analysis. Contact our team at Seneca Cost Segregation, and we’ll present you with a no-cost estimate of the specific savings and ROI available for your property.

Our average first-year deduction is $171,243, and we use proprietary technology to provide accurate and comprehensive studies.

Key Factors Influencing ROI

Several factors determine whether your cost segregation study will deliver exceptional returns or fall short of expectations:

Property Value and Depreciable Basis

Properties need at least $300,000 in depreciable basis (excluding land value) to make economic sense. The sweet spot begins around $500,000-$750,000, where the math really works in your favor.

Land values can kill your ROI.

In expensive markets like cost segregation studies in California or Manhattan, properties may often have 70-80% of their value allocated to land.

Since land isn’t depreciable, a $1 million purchase with $800,000 in land value leaves only $200,000 for the building – not enough to justify a professional study.

Your Tax Situation

Your tax bracket multiplies the value of every depreciation dollar.

The same $100,000 in additional depreciation generates:

• $24,000 in savings at the 24% tax bracket
• $37,000 in savings at the 37% tax bracket
• $50,000+ in savings in high-tax states with combined rates reaching ~50%

Real Estate Professional (REP) status changes the game completely.

Without this designation, rental property losses face passive activity limitations – you can only deduct $25,000 annually against active income if you actively participate in the rental activity (phasing out at higher income levels)

Real Estate Professionals can use unlimited rental losses to offset W-2 wages and business income.

Timing and Bonus Depreciation

Properties placed in service after January 19, 2025, benefit from permanent 100% bonus depreciation, thanks to the recent One Big Beautiful Bill Act.

This means you can write off 100% of the shorter-lived assets immediately instead of spreading the deductions over 5-15 years.

When Cost Segregation Provides the Highest Returns

Certain property types and investor situations create optimal conditions for exceptional cost segregation returns.

Here are the scenarios that deliver the best results and when cost segregation makes sense:

• Major Renovations During Ownership: You can write off the remaining basis of replaced components while claiming accelerated depreciation on new improvements.
• Income Spike Years: Business owners experiencing unusual income from asset sales or bonuses can offset these peaks with large depreciation deductions.
• High Tax Brackets: Investors in the 32-37% federal bracket maximize every dollar of depreciation, especially in high-tax states.
• Look-Back Studies on Older Properties: Properties owned 3-7 years can capture all missed depreciation as an immediate lump-sum deduction.
• Properties with Extensive Land Improvements: Parking lots, landscaping, and site utilities qualify for 15-year depreciation instead of building schedules.
• Multi-Property Portfolio Owners: Can leverage economies of scale and apply lessons across multiple studies.
• High-Amenity Multifamily Properties: Fitness centers, pools, and clubhouses create additional reclassification opportunities beyond basic apartment units.

When Cost Segregation Studies Don’t Deliver Profitable ROI

Some situations make cost segregation a poor investment despite the strategy’s general effectiveness.

Avoid these scenarios:

• Properties in the Pre-Development Phase: Buildings generating expenses without revenue cannot immediately utilize depreciation increases.
• Properties Under $300,000 Basis: Study costs consume too much of the potential savings to justify the investment.
• High Land Values: Properties with 70-80% land allocation leave a minimal depreciable building basis.
• Short Hold Periods: Properties sold within 1-3 years face depreciation recapture that eliminates most benefits.
• Partnership Conflicts: Partners in different tax situations may disagree on the study value when benefits flow unequally.
• Inadequate Documentation: Properties lacking construction records require expensive estimation work that reduces precision and increases costs.
• Properties Nearing Depreciation End: Buildings already 20-30 years into depreciation schedules offer limited acceleration value.

How to Calculate ROI for Cost Segregation

The basic ROI calculation follows a straightforward formula:

(Tax Savings – Study Cost) ÷ Study Cost × 100%

For a property generating $80,000 in first-year tax savings from a $10,000 study:

($80,000 – $10,000) ÷ $10,000 × 100 = 700% first-year ROI

To calculate your specific tax savings, you need to find out how much additional depreciation cost segregation will generate and multiply that by your tax rate.

Step 1: Calculate Your Tax Savings

Tax savings equal the increased depreciation multiplied by your effective tax rate.

If cost segregation generates $200,000 in additional first-year depreciation for someone in the 35% bracket:

$200,000 × 0.35 = $70,000 in tax savings.

Step 2: Estimate Reclassifiable Amounts

You can estimate how much of your property qualifies for reclassification (shorter depreciation) schedules using these property-type percentages:

• Manufacturing Facilities: 30-60% can be reclassified
• Hotels and Hospitality: 25-40% because of lots of furniture and special facilities
• Multifamily with Amenities: 25-35% from repeated features and shared spaces
• Basic Warehouses: Only 12-20% because of simple construction

These are just estimates. The actual reclassifiable amounts depend on a lot of things!

Step 3: Apply the Depreciation Formula

For properties with 100% bonus depreciation, the calculation becomes:

Total First-Year Depreciation = Reclassified Amount (immediately deductible) + Standard Depreciation on Remaining Building

Example Calculation of ROI for Cost Segregation

Let’s say you purchase a $1 million residential property with the following breakdown:

• Purchase price: $1,000,000
• Improvements made: $50,000
• Land value: $150,000 (not depreciable)
• Cost basis for depreciation: $900,000 (purchase + improvements – land)

A cost segregation study finds that 28% can be reclassified ($252,000). This percentage comes from identifying items like appliances, carpeting, landscaping, and fixtures that qualify for faster depreciation:

• Personal property: 12% × $900,000 = $108,000
• Site improvements: 16% × $900,000 = $144,000
• Remaining building structure: $648,000 (still depreciated over 27.5 years)

Year 1 depreciation comparison:

• Without cost segregation: $900,000 ÷ 27.5 = $32,727.27
• With cost segregation (60% bonus depreciation – 2024): ($108,000 × 0.60) + ($144,000 × 0.60) + ($648,000 ÷ 27.5) = $174,763.64

Tax impact calculation:

• Additional first-year depreciation: $174,763.64 – $32,727.27 = $142,036.37
• Tax savings at 39% rate: $142,036.37 × 0.39 = $55,394.18

ROI on study cost:

• Against $10,000 study cost: ($55,394.18 – $10,000) ÷ $10,000 = 4.54x ROI
• Against $5,000 study cost: ($55,394.18 – $5,000) ÷ $5,000 = 10.08x ROI

Want to see what your specific property could generate? Use our cost segregation calculator to get a personalized estimate of your potential tax savings and ROI based on your property’s characteristics.

Cost Segregation Case Studies

Real property owners in different industries have saved big on taxes through cost segregation.

These Seneca Cost Segregation case studies show how well this strategy works for various property types:

Note: Study costs cannot be disclosed due to client confidentiality agreements, but all properties achieved substantial positive ROI.

Tax savings ranged from $41,832 for smaller single-family investments to over $400,000 for large multi-family developments.

Even the smallest property in our examples generated enough savings to fund additional property improvements or debt service reduction.

Frequently Asked Questions (FAQs)

Here are answers to the most common questions about cost segregation ROI and implementation:

Is Cost Segregation Worth It?

Yes, for most properties above $300,000 in depreciable basis.

Properties consistently generate 4-30x returns on study costs with many achieving even higher multiples.

Can I Do My Own Cost Segregation Study?

The IRS allows DIY studies but requires preparers to have expertise in both construction and tax law. Most property owners lack the engineering knowledge to properly classify components or defend positions during audits.

How Much Does a Cost Segregation Study Cost?

Tax savings should far exceed the cost many times over. Study fees depend on factors like property size, type, and complexity.

We offer cost-effective pricing for every property and provide a proposal before any study begins. Request a proposal now.

Are Cost Segregation Studies IRS Approved?

Yes, cost segregation is fully IRS-approved and recognized as the correct method for depreciating building components. The IRS publishes a comprehensive audit techniques guide providing explicit guidance for taxpayers and practitioners.

Properly prepared studies following IRS guidelines face minimal audit risk.

Conclusion

Cost segregation offers some of the highest returns in real estate investing. Smart investors don’t wait – they act while 100% bonus depreciation is permanent.

At Seneca Cost Segregation, we turn 20-40% of your property cost into immediate tax savings. Our engineers have conducted over 10,200 studies across all 50 states and have more than 12 years of experience, analyzing a cost basis of over $5 billion. Every study includes our audit defense guarantee and money-back protection.

Our veteran-owned firm delivers results fast – typically within 2-4 weeks. We start with a free estimate showing your potential savings before you invest anything. Contact us today to request a free proposal.